Allowance for Loan Losses | ALLOWANCE FOR LOAN LOSSES We maintain an ALL at a level determined to be adequate to absorb estimated probable credit losses inherent in the loan portfolio as of the balance sheet date. We develop and document a systematic ALL methodology based on the following portfolio segments: 1) CRE, 2) C&I, 3) Commercial Construction, 4) Consumer Real Estate and 5) Other Consumer. The following are key risks within each portfolio segment: CRE —Loans secured by commercial purpose real estate, including both owner occupied properties and investment properties for various purposes such as hotels, strip malls and apartments. Operations of the individual projects as well as global cash flows of the debtors are the primary sources of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the collateral type as well as the business prospects of the lessee, if the project is not owner occupied. C&I —Loans made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the company is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the company. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. Commercial Construction —Loans made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be complete, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer. Consumer Real Estate —Loans secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residences, including purchase money mortgages. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt. Other Consumer —Loans made to individuals that may be secured by assets other than 1-4 family residences, as well as unsecured loans. This segment includes auto loans, unsecured loans and lines and credit cards. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values. We further assess risk within each portfolio segment by pooling loans with similar risk characteristics. For the commercial loan classes, the most important indicator of risk is the internally assigned risk rating, including pass, special mention and substandard. Consumer loans are pooled by type of collateral, lien position and LTV ratio for Consumer Real Estate loans. Historical loss rates are applied to these loan pools to determine the reserve for loans collectively evaluated for impairment. The ALL methodology for groups of loans collectively evaluated for impairment is comprised of both a quantitative and qualitative analysis. A key assumption in the quantitative component of the reserve is LEP. The LEP is an estimate of the average amount of time from the point at which a loss is incurred on a loan to the point at which the loss is confirmed. Another key assumption is LBP, which represents the historical data period utilized to calculate loss rates. Management monitors various credit quality indicators for both the commercial and consumer loan portfolios, including delinquency, nonperforming status and changes in risk ratings on a monthly basis. The following tables present the age analysis of past due loans segregated by class of loans as of the dates presented: December 31, 2015 (dollars in thousands) Current 30-59 Days Past Due 60-89 Days Past Due Non- performing Total Past Due Loans Total Loans Commercial real estate $ 2,145,655 $ 11,602 $ 627 $ 8,719 $ 20,948 $ 2,166,603 Commercial and industrial 1,244,802 2,453 296 9,279 12,028 1,256,830 Commercial construction 401,084 3,517 90 8,753 12,360 413,444 Residential mortgage 631,085 1,728 930 5,629 8,287 639,372 Home equity 465,055 2,365 523 2,902 5,790 470,845 Installment and other consumer 73,486 242 111 100 453 73,939 Consumer construction 6,579 — — — — 6,579 Loans held for sale 35,179 94 48 — 142 35,321 Total $ 5,002,925 $ 22,001 $ 2,625 $ 35,382 $ 60,008 $ 5,062,933 December 31, 2014 (dollars in thousands) Current 30-59 Days Past Due 60-89 Days Past Due Non- performing Total Past Due Loans Total Loans Commercial real estate $ 1,674,930 $ 2,548 $ 323 $ 4,435 $ 7,306 $ 1,682,236 Commercial and industrial 991,136 1,227 153 1,622 3,002 994,138 Commercial construction 214,174 — — 1,974 1,974 216,148 Residential mortgage 485,465 565 1,220 2,336 4,121 489,586 Home equity 414,303 1,756 445 2,059 4,260 418,563 Installment and other consumer 65,111 352 73 31 456 65,567 Consumer construction 2,508 — — — — 2,508 Loans held for sale 2,970 — — — — 2,970 Total $ 3,850,597 $ 6,448 $ 2,214 $ 12,457 $ 21,119 $ 3,871,716 We continually monitor the commercial loan portfolio through an internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies. Loans within the pass rating generally have a lower risk of loss than loans risk rated as special mention and substandard. Our risk ratings are consistent with regulatory guidance and are as follows: Pass —The loan is currently performing and is of high quality. Special Mention —A special mention loan has potential weaknesses that warrant management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects or in the strength of our credit position at some future date. Economic and market conditions, beyond the borrower’s control, may in the future necessitate this classification. Substandard —A substandard loan is not adequately protected by the net worth and/or paying capacity of the borrower or by the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. The following tables present the recorded investment in commercial loan classes by internally assigned risk ratings as of the dates presented: December 31, 2015 (dollars in thousands) Commercial Real Estate % of Total Commercial and Industrial % of Total Commercial Construction % of Total Total % of Total Pass $ 2,094,851 96.7 % $ 1,182,685 94.1 % $ 375,808 90.9 % $ 3,653,344 95.2 % Special mention 19,938 0.9 % 43,896 3.5 % 19,846 4.8 % 83,680 2.2 % Substandard 51,814 2.4 % 30,249 2.4 % 17,790 4.3 % 99,853 2.6 % Total $ 2,166,603 100.0 % $ 1,256,830 100.0 % $ 413,444 100.0 % $ 3,836,877 100.0 % December 31, 2014 (dollars in thousands) Commercial Real Estate % of Total Commercial and Industrial % of Total Commercial Construction % of Total Total % of Total Pass $ 1,635,132 97.2 % $ 948,663 95.4 % $ 196,520 90.9 % $ 2,780,315 96.1 % Special mention 23,597 1.4 % 30,357 3.1 % 12,014 5.6 % 65,968 2.3 % Substandard 23,507 1.4 % 15,118 1.5 % 7,614 3.5 % 46,239 1.6 % Total $ 1,682,236 100.0 % $ 994,138 100.0 % $ 216,148 100.0 % $ 2,892,522 100.0 % We monitor the delinquent status of the consumer portfolio on a monthly basis. Loans are considered nonperforming when interest and principal are 90 days or more past due or management has determined that a material deterioration in the borrower’s financial condition exists. The risk of loss is generally highest for nonperforming loans. The following tables present the recorded investment in consumer loan classes by performing and nonperforming status as of the dates presented: December 31, 2015 (dollars in thousands) Residential Mortgage % of Total Home Equity % of Total Installment and other consumer % of Total Consumer Construction % of Total Total % of Total Performing $ 633,743 99.1 % $ 467,943 99.4 % $ 73,839 99.8 % $ 6,579 100.0 % $ 1,182,104 99.3 % Nonperforming 5,629 0.9 % 2,902 0.6 % 100 0.2 % — — % 8,631 0.7 % Total $ 639,372 100.0 % $ 470,845 100.0 % $ 73,939 100.0 % $ 6,579 100.0 % $ 1,190,735 100.0 % December 31, 2014 (dollars in thousands) Residential Mortgage % of Total Home Equity % of Total Installment and other consumer % of Total Consumer Construction % of Total Total % of Total Performing $ 487,250 99.5 % $ 416,504 99.5 % $ 65,536 99.9 % $ 2,508 100.0 % $ 971,798 99.5 % Nonperforming 2,336 0.5 % 2,059 0.5 % 31 0.1 % — — % 4,426 0.5 % Total $ 489,586 100.0 % $ 418,563 100.0 % $ 65,567 100.0 % $ 2,508 100.0 % $ 976,224 100.0 % We individually evaluate all substandard and nonaccrual commercial loans greater than $0.5 million for impairment. Loans are considered to be impaired when based upon current information and events it is probable that we will be unable to collect all principal and interest payments due according to the original contractual terms of the loan agreement. All TDRs will be reported as an impaired loan for the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and it is expected that the remaining principal and interest will be fully collected according to the restructured agreement. For all TDRs, regardless of size, as well as all other impaired loans, we conduct further analysis to determine the probable loss and assign a specific reserve to the loan if deemed appropriate. The following tables summarize investments in loans considered to be impaired and related information on those impaired loans as of the dates presented: December 31, 2015 December 31, 2014 (dollars in thousands) Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance With a related allowance recorded: Commercial real estate $ — $ — $ — $ — $ — $ — Commercial and industrial — — — — — — Commercial construction 500 1,350 3 — — — Consumer real estate 116 116 32 43 43 43 Other consumer 2 2 2 20 20 11 Total with a Related Allowance Recorded 618 1,468 37 63 63 54 Without a related allowance recorded: Commercial real estate 12,661 13,157 — 19,890 25,262 — Commercial and industrial 14,417 15,220 — 9,218 9,449 — Commercial construction 10,998 14,200 — 7,605 11,293 — Consumer real estate 6,845 7,521 — 7,159 7,733 — Other consumer 111 188 — 42 48 — Total without a Related Allowance Recorded 45,032 50,286 — 43,914 53,785 — Total: Commercial real estate 12,661 13,157 — 19,890 25,262 — Commercial and industrial 14,417 15,220 — 9,218 9,449 — Commercial construction 11,498 15,550 3 7,605 11,293 — Consumer real estate 6,961 7,637 32 7,202 7,776 43 Other consumer 113 190 2 62 68 11 Total $ 45,650 $ 51,754 $ 37 $ 43,977 $ 53,848 $ 54 As of December 31, 2015, we had $45.7 million of impaired loans which included $9.9 million of acquired loans that experienced credit deterioration since the acquisition date. The following table summarizes investments in loans considered to be impaired and related information on those impaired loans for the years presented: For the Year Ended December 31, 2015 December 31, 2014 (dollars in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With a related allowance recorded: Commercial real estate $ — $ — $ — $ — Commercial and industrial — — — — Commercial construction 834 — — — Consumer real estate 120 7 48 4 Other consumer 2 — 24 2 Total with a Related Allowance Recorded 956 7 72 6 Without a related allowance recorded: Commercial real estate 14,622 597 20,504 684 Commercial and industrial 14,416 450 9,246 241 Commercial construction 10,581 329 8,145 227 Consumer real estate 6,902 364 7,027 396 Other consumer 117 1 56 2 Total without a Related Allowance Recorded 46,638 1,741 44,978 1,550 Total: Commercial real estate 14,622 597 20,504 684 Commercial and industrial 14,416 450 9,246 241 Commercial construction 11,415 329 8,145 227 Consumer real estate 7,022 371 7,075 400 Other consumer 119 1 80 4 Total $ 47,594 $ 1,748 $ 45,050 $ 1,556 The following tables detail activity in the ALL for the periods presented: 2015 (dollars in thousands) Commercial Real Estate Commercial and Industrial Commercial Construction Consumer Real Estate Other Consumer Total Loans Balance at beginning of year $ 20,164 $ 13,668 $ 6,093 $ 6,333 $ 1,653 $ 47,911 Charge-offs (2,787 ) (5,463 ) (3,321 ) (2,167 ) (1,528 ) (15,266 ) Recoveries 3,545 605 143 495 326 5,114 Net Recoveries (Charge-offs) 758 (4,858 ) (3,178 ) (1,672 ) (1,202 ) (10,152 ) Provision for loan losses (5,879 ) 2,043 9,710 3,739 775 10,388 Balance at End of Year $ 15,043 $ 10,853 $ 12,625 $ 8,400 $ 1,226 $ 48,147 2014 (dollars in thousands) Commercial Real Estate Commercial and Industrial Commercial Construction Consumer Real Estate Other Consumer Total Loans Balance at beginning of year $ 18,921 $ 14,433 $ 5,374 $ 6,362 $ 1,165 $ 46,255 Charge-offs (2,041 ) (1,267 ) (712 ) (1,200 ) (1,133 ) (6,353 ) Recoveries 1,798 3,647 146 350 353 6,294 Net (Charge-offs)/ Recoveries (243 ) 2,380 (566 ) (850 ) (780 ) (59 ) Provision for loan losses 1,486 (3,145 ) 1,285 821 1,268 1,715 Balance at End of Year $ 20,164 $ 13,668 $ 6,093 $ 6,333 $ 1,653 $ 47,911 Loans acquired in the Merger were recorded at fair value with no carryover of the ALL. As of December 31, 2015, acquired loans from the Merger of $673.3 million were outstanding, which decreased from $788.7 million at the Merger date. Additional credit deterioration on acquired loans during 2015, in excess of the original credit discount embedded in the fair value determination on the date of acquisition, was recognized in the ALL through the provision for loan losses. The following tables present the ALL and recorded investments in loans by category as of December 31: 2015 Allowance for Loan Losses Portfolio Loans (dollars in thousands) Individually Evaluated for Impairment Collectively Evaluated for Impairment Total Individually Evaluated for Impairment Collectively Evaluated for Impairment Total Commercial real estate $ — $ 15,043 $ 15,043 $ 12,661 $ 2,153,942 $ 2,166,603 Commercial and industrial — 10,853 10,853 14,417 1,242,413 1,256,830 Commercial construction 3 12,622 12,625 11,498 401,946 413,444 Consumer real estate 32 8,368 8,400 6,961 1,109,835 1,116,796 Other consumer 2 1,224 1,226 113 73,826 73,939 Total $ 37 $ 48,110 $ 48,147 $ 45,650 $ 4,981,962 $ 5,027,612 2014 Allowance for Loan Losses Portfolio Loans (dollars in thousands) Individually Evaluated for Impairment Collectively Evaluated for Impairment Total Individually Evaluated for Impairment Collectively Evaluated for Impairment Total Commercial real estate $ — $ 20,164 $ 20,164 $ 19,890 $ 1,662,346 $ 1,682,236 Commercial and industrial — 13,668 13,668 9,218 984,920 994,138 Commercial construction — 6,093 6,093 7,605 208,543 216,148 Consumer real estate 43 6,290 6,333 7,202 903,455 910,657 Other consumer 11 1,642 1,653 62 65,505 65,567 Total $ 54 $ 47,857 $ 47,911 $ 43,977 $ 3,824,769 $ 3,868,746 |